COMPANY LAW ASSIGNMENT

Topic: LIMITED
LIABILITY

Submitted by
VISWAM KV
BCOM LLB
 Sixth
semester

LIMITED LIABILITY
INTRODUCTION
‘Liability’ means to what extent a person can be made to
account at law. Liability is the condition of one who is subject to
a duty which may be judicially enforced; that for which one is
liable. Liability is responsibility; the state of one who is bound in
law and justice to do something which may be enforced by
action. The liability may arise f0 contracts. either express or
implied or in consequence of torts committed.
Liability’ is a broad term of large and comprehensive
significance and means-legal responsibility or obligation to do a
thing or to refrain from doing something
WHAT IS LIMITED LIABILITY?
Generally, the company itself is always fully liable to pay its
debts so long as there are assets available to pay the debts.
When the company goes into liquidation, the debts must be
paid in a strict order to the extent of availability of assets.
However, companies have limited liability. In a company with
limited liability a member of a company is liable to the company
to a limited extent, that is to say, the extent to which he has
agreed to subscribe for shares of a company. Presume, A has
subscribed for 100 shares in a company and the nominal value
of the share is Rs. 10 each. On application he paid Rs. 5 for
each share. The balance of Rs. 5/on each share, he is bound
to pay as and when the company makes the call. It may be
during the life-time of the company or when the company is
being wound up. The liability of a member is limited to the
balance of Rs. 5/on each share and nothing more. This is the
meaning of limited liability.

It follows from the fact that a corporation is a separate person

that its members are not as such liable for its debts. Hence in
the absence of express provision to the contrary the members
will be completely free from any personal liability. This is, in
fact, the position as regards municipal and ecclesiastical
corporations and the rapidly decreasing number of public
corporations, and may be so as regards statutory and
chartered companies, the members of which will be under
personal liability only if, and to the extent that, the statute or
charter so provides.
But as regards a company registered under the Companies
Acts a complete absence of any liability is not permitted. Such
a company can either be registered as unlimited, in which case
the members are in effect guarantors of its obligations without
any restriction on amount, or it can be limited by shares or
guarantee. In the case of a company limited by shares each
member is liable to contribute When called upon to do so the
full nominal value of the shares held by him in so far as this has
not already been paid by him or any prior holder of those
shares. In the case of a guarantee company each member is
liable to contribute a specified amount to the assets of the
company in event of Its being wound up while he is a member
or within one car after he ceases to be a member. In effect the
member, without being directly liable to the company’s
creditors, is in both cases a limited guarantor of the company.
When, therefore, obligations are incurred on behalf of a
company, the company IS liable and not the members, though
the company may ultimately be able to recover a contribution
from them to enable it to discharge its obligations. If the
company is an unlimited one their liability to contribute will be
unlimited; if it is limited by shares their liability will be limited to
the unpaid nominal value of their shares and in practice their
shares are today likely to be fully paid up so that they will be
under no further liability. If the company is limited by guarantee
they will be under no liability until it is wound up, and then, in
practice, only for a derisory sum.
In contrast, an unincorporated association, not being a legal
person, cannot be liable, and obligations entered into on its
behalf can bind only the actual officials who purport to act on its
behalf, or the individual members if the officials have actual or
apparent authority to bind them. In either event the persons
bound will be liable to the full extent of their property unless
they expressly or impliedly restrict their responsibility to the
extent of the funds of the association, as the officials may well
do. Hence the extent to which the member will be liable
depends on the terms of the contract of association. In the
case of a club, and presumably the same applies to learned
and scientific societies, there will generally be implied a term
that the members are not personally liable for obligations
incurred on behalf of the club. But very different is the position
of members of a partnership, an association carrying on
business for gain. Each partner is an agent of all the others and
his acts done in “carrying on in the nominal way business of the
 kind carried on by the firm” bind the partners Only if the creditor
knows of the limitation placed on the partners’ authority will the
other members escape liability. Moreover, an attempt to restrict
the partners’ liability to partnership funds by a provision to that
effect in the partnership agreement Will be ineffective even if
known to the creditors”; they will only be able to restrict their
financial liability, in respect of acts otherwise authorised. by an
express agreement to that effect with the creditor concerned.
There is. it is true, now a method whereby liability can be
limited without forming an incorporated company; namely, by a
limited partnership under the Limited Partnerships Act 1907.
But this has many disadvantages in comparison with a
company. In particular, it is not possible to limit the personal
liability of all the partners but only some of them. Moreover,
even the limited partners lose their privilege of limited liability if
they take any part in the management of the business.” This
latter rule is especially inconvenient, for although a person who
puts money into a business may be happy to leave the running
of it to his colleagues while all goes well, he will probably want
to be able to intervene if things go wrong. If a limited partner
does so, his attempt to salvage the wreck may well result in the
whole of his fortune sinking with it.

CONCLUSION.
Hence a limited company is generally found preferable. It
enables the liability of all the members to be limited without
restriction on the part which they play in the management, and,
although it involves somewhat greater formality, publicity and
expense, these are not very onerous. In practice, therefore,
limited partnerships are used only where for some reason an
incorporated company is inappropriate (e.g. in the case of
certain professions which companies are not allowed to
practise) but one member of the firm is not prepared to accept
full liability for its debts or the other partners do not want him to
play any part in the management. This may occur on the
retirement from active participation of a senior partner whom it
is wished to retain as a consultant or for the prestige value of
his name and reputation. Save in these rare cases where
limited partnerships are appropriate, the only practical
alternatives at present are either complete personal liability or
limited liability through the medium of a company. The
unattractiveness of both these options to the accountancy
profession, in particular, has generated pressures for a review
of the Limited Partnership Act, as we shall see below, which is
being undertaken currently.
The overall result of the broad recognition by the courts of the
separate legal entity of the company and of the limited liability
of it’s members and managers is to produce at first sight a legal
regime WW is very unfavourable to potential creditors of
companies, a situation which they have naturally sought to
readjust in their favour, so far as is in their power. For large
lenders, especially banks, there are a number of possibilities,
to be used separately or cumulatively. Apart from the obvious
commercial response of charging higher interest rates on loans
to bodies whose members have limited liability, such lenders
may seek to leap over the barrier created by the law of limited
liability by exacting as the price of the loan to the company
personal guarantees of its repayment from the managers or
shareholders of the company, guarantees which may be
secured on the personal assets of me individuals concerned.
Instead of or in addition to obtaining personal security by
contracting around limited liability, large lenders may seek to
improve the priority of their claims by taking real security
against the company’s assets.
However, these self-help remedies may not be practicable for
trade creditors or employees and, even in the case of large
lenders, there is a strong danger that, when things begin to go
wrong, the controllers of the company will take risks with the
company’s capital which were not within the contemplation of
the parties when the loan was arranged. For these reasons,
although the legislature has not overturned Salomon v.
Salomon and, indeed, under the influence of Community law,
the one-person company is now expressly recognised by
English law, the Companies and Insolvency Acts are full of
provisions whose purpose cannot be completely understood
except against the background of limited liability. These range
from the extensive publicity and disclosure obligations placed
upon limited liability companies to priorities for certain classes
of unsecured creditors on the winding-up of a company, the
which priorities override even floating (but not fixed)
charges. Recently added to these statutory weapons are the
provisions relating to wrongful trading and the expanded
provisions on the disqualification of directors, especially on
grounds of unfitness.
BIBLIOGRAPHY
 Avtar Singh, Company Law
 L.C.B. Gower, Principles of Modern Company Law